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Review Your SQE 1 Practice Records

Examination Timing: 00H01M54S

Elizabeth owns shares in several companies and has some cash in savings which are held in an Individual Savings Account (ISA). During the tax year, Elizabeth received dividends and interest from her investments. At the end of the tax year, she sold the shares in one of these companies at a capital loss. Elizabeth also made a capital gain on the sale of her real property. 


Which of the following statements correctly describes the legal position in respect of the current tax year?

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Individual Savings Accounts (ISAs) are tax-advantaged savings and investment accounts. Dividends and interest earned on investments held within an ISA are not subject to income tax. Additionally, any capital gains made within an ISA are not subject to Capital Gains Tax (CGT). However, any capital losses incurred on investments within an ISA cannot be used to offset capital gains made on investments held outside the ISA. In Elizabeth's case, she will not pay tax on the dividends and interest received from her ISA investments, and she cannot use the capital loss from her ISA to offset the capital gain made on the sale of her real property.


Key Point: ISAs provide tax benefits on income and capital gains within the account. However, capital losses within an ISA cannot be used to reduce CGT liabilities on investments held outside the ISA.

Collect Question

Help me detail ISA.

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Certainly! An Individual Savings Account (ISA) is a special type of savings and investment account available in the UK that offers significant tax advantages. Here's a detailed explanation:

1. **Tax Advantages**:
- **Income Tax**: Any dividends and interest earned on investments held within an ISA are completely tax-free. This means that Elizabeth does not have to pay any income tax on the dividends and interest she earns from her ISA investments.
- **Capital Gains Tax (CGT)**: Any capital gains made from the sale of investments within the ISA are also exempt from CGT. This benefit allows for potentially significant tax savings as the investments grow in value over time.

2. **Types of ISAs**:
- **Cash ISA**: A type of savings account where the interest earned is tax-free.
- **Stocks and Shares ISA**: This allows individuals to invest in shares, bonds, and funds, with any dividends and capital gains sheltered from tax.
- **Innovative Finance ISA**: Includes peer-to-peer lending and crowdfunding investments.
- **Lifetime ISA**: Designed for those under 40 to save for a first home or retirement, offering a government bonus on contributions.

3. **Contribution Limits**:
- For the current tax year, the maximum total amount you can save across all the ISAs combined is £20,000. This limit can be allocated entirely to one type of ISA or split between different types.

4. **No CGT Offset**:
- One key point to remember, as highlighted in the explanation, is that while ISAs offer tax advantages, any capital losses incurred within an ISA cannot be used to offset capital gains made from investments held outside the ISA. In Elizabeth's case, although she made a capital loss on the sale of shares within her ISA, she cannot use this loss to reduce the CGT liability on the capital gain she made on the sale of her real property.

Overall, ISAs are a powerful tool for saving and investing tax-efficiently in the UK. They help individuals grow their savings without the burden of taxes on the earnings within the account. Keep this in mind as you navigate your study of tax law and its applications!

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